Texas Bar Journal - January 2018

Insurance Law

Michael W. Huddleston 2017-12-20 21:11:25

Standing alone at the end of an eventful year of insurance law decisions is USAA Texas Lloyds Co. v. Menchaca.1 The court in that case affirmed its decision in Vail v. Texas Farm Bureau Mut. Ins. Co.,2 which surprised many. The court also reaffirmed its commitment to stare decisis and to the continuing need for common law and statutory “bad faith” actions as an antidote to inappropriate first-party carrier behavior.
The issue in Menchaca: “[W]hether the insured can recover policy benefits based on jury findings that the insurer violated the Texas Insurance Code and that the violation resulted in the insured’s loss of benefits the insurer ‘should have paid’ under the policy, even though the jury also failed to find that the insurer failed to comply with its obligations under the policy.” The court held policy benefits could serve as “actual damages,” but the court remanded in the interests of justice given the significant clarification in the law provided by the court’s opinion.
Menchaca held that the common law and statutory duties “supplement” the parties’ contractual rights by “imposing procedural requirements that govern the manner in which insurers review and resolve an insured’s claim for policy benefits.” Reviewing the seemingly conflicting Texas law on the subject, the court distilled “five distinct but interrelated rules that govern the relationship between contractual and extra-contractual claims”:
1) Coverage: The insured must be legally entitled to coverage in order to recover “lost benefits” under statute;
2) Nexus: Carrier conduct must have a causal nexus to the loss of the benefits, noting Vail as an example;
3) Absence of Coverage—Other Actions: Contract benefits may be recovered absent coverage if the insurer caused the benefits to be lost. The court gave three examples: (a) misrepresentation of a policy’s coverage; (b) waiver and/or estoppel of the carrier’s right to deny coverage; and (c) a violation causing the forfeiture of contract benefits;
4) Independent Injuries: If there is no coverage, the insured can still recover damages from an independent injury not flowing from the contract; and
5) Predicate: The statutory conduct must cause either the loss of actually covered benefits or an independent injury.
Rule 3 opens a number of potential new frontiers for policyholders to consider. The suggested expansion of waiver and estoppel is particularly significant.
Explaining the fourth rule, the court stated: “[A]n insurer’s statutory violation does not permit the insured to recover any damages beyond policy benefits unless the violation causes an injury that is independent from the loss of the benefits.” The court noted as an example Twin City Fire Ins. Co. v. Davis,3 holding that an insured who prevails on a statutory claim cannot recover punitive damages for bad-faith conduct in the absence of independent actual damages arising from that conduct.
The defense bar suggests that the court limited recovery to the lost benefits, excluding recovery of additional damages absent an independent injury. Policyholders counter that this is inconsistent with (a) the court’s reaffirmation of Vail, which the Menchaca court expressly recognized allowed lost contract benefits to be trebled without an independent injury; (b) its holding that policy benefits are actual damages recoverable in contract or for statutory violations; (c) Twin City, which dealt with a common law bad faith claim for punitive damages, which was not involved in Menchaca, and (d) the fact Twin City involved the “exclusive remedy” provision of the workers compensation act and thus presented a situation where there were no policy benefits payable.
Subsequent decisions interpreting Menchaca are conflicting. 4 The Insurance Code itself does not require an independent injury for recovery of additional damages. It requires only “actual damages,” which, as Vail held, clearly includes lost contract benefits. USAA has filed a motion for rehearing in Menchaca asking for rendition or alternatively for more clarification for retrial.
Notes
1) 2017 WL 1311752 (Tex. 2017).
2) 754 S.W.2d 129 (Tex. 1988).
3) 904 S.W.2d 663, 666 (Tex. 1995).
4) See, e.g., Cano v. State Farm Lloyds, 2017 WL 3279139 (N.D. Tex. 2017)(holding that if there is no coverage, no additional damages are recoverable absent an independent injury) ; Nat’l Sec. Fire &amp; Cas. Co. v. Hurst, 2017 WL 2258243 (Tex. App.—Houston [1st.] 2017, pet. for rev. pending)(same); State Farm Lloyds v. Webb, 2017 WL 1739763 (Tex. App.—Beaumont 2017, no pet. hist.)(holding that policy benefits could not be trebled even if there was coverage and a causal nexus shown).
MICHAEL W. HUDDLESTON is an equity partner in Munsch Hardt Kopf &amp; Harr and chairs the firm’s insurance practice group. He provides counsel and litigates insurance coverage and bad faith cases for policyholders and claimants.